Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 17529

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF INDONESIA

EAST JAVA BALI URBAN DEVELOPMENT PROJECT(Loan 3304-IND)

March 25, 1998

Urban Development Sector UnitIndonesia Country Management UnitEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTSCurrency Unit = Rupialh (Rp)

(As of January 1991)Rp I million - US$526; US$1.00 = Rp 1,901

(As of September 1997)Rp 1 million = US$305; US$1.00 = Rp 3,275

FISCAL YEAR OF BORROWERApril 1 - March 31

WEIGHTS AND MEASURESMetric Units

ABBREVIATIONS AND ACRONYMSADB - Asian Development BankAMDAL - GOI Environmental Assessment ProcessBUIP - Bali Urban Infrastructure ProjectEA - Environmental AssessmentEJB - East Java Bali Urban Development ProjectEJ2 - Second East Java Urban Development Pro'jectEIRR - Economic Internal Rate of ReturnGOI - Government of IndonesiaICR - Implementation Completion ReportIllIDP - lntegrated Urban Infrastructure Development ProgramKI P - Kampung (neighborhood) Improvement ProgramLIDAP - Local Institutional Development Action PlanMIIP - Market Infrastructure Improvement ProgramO & M - Operations and MaintenancePDAM - Local Government Water EnterprisePFAMS - Project Financial Accounting and Managemenit SystemPJM - Medium-term (five year) Investment ProgramnPOMMS - Performance Oriented Maintenance Managemnenit SystemPSP - Private Sector ParticipationRIAP - Revenue Improvement Action PlanSAR - Staff Appraisal ReportSLAIP - Subsidiary Loan Agreement witlh Pre-finanicingcSPABP - Funds Channeling Documents for Special Grants to Lower Level

GovernmentsTA - Technical AssistancelUNDP - United Nations Development Programme

Vice President Severino, Jean-MichelCountry Director de Tray, DennisSector Manager Varma, KeshavTask Manager Iyer, Raja

FOR OFFICIAL USE ONLY

IMPLEMENTATION COMPLETION REPORTREPUBLIC OF INDONESIA

EAST JAVA BALI URBAN DEVELOPMENT PROJECT (Loan 3304-IND)

Table of ContentsPREFACE .S................EVALUATION SUMMARY .111..... ;

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. STATEMENTIEVALUATION OF OBJECTIVES .B. ACHIEVEMENT OF PROJECT OBJECTIVES .2C. MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION .7D. PROJECT SUSTAINABILITY .8*E. BANK PERFORMANCE.8F. BORROWERPERFORMANCE .9G. ASSESSMENT OF OUTCOME .0H. FUTURE OPERATION.101. KEY LESSONS LEARNED .10

PART II: STATISTICAL ANNEXES

ANNEX A: STATISTICAL TABLES

TABLE 1: SUMMARY OF ASSESSMENT .12TABLI 2: RELATED URBAN AND WATER SUPPLY BANK LOANS .13TABLE 3: PROJECT TIMETABLE .15TABLE 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL. 1 5TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION .16TABLE 6: KEY PERFROMANCE INDICATORS FOR PROJECT OPERATION ......................................... **. 1 8TAI1LE 7: STUDIES INCLUDED IN PROJECT .......................................... : 25T Axl.E 8A: PROJECT COSTS.26

TABLE 8B: PROJECT FINANCING ......................................... 27TABLE 9: ECONOMIC COSTS AND BENEFITS .28TABLE 10: STATUS OF LEGAL COVENANTS .......................................... . . . 3 1TABLE II: COMPLLANCE WITH OPERATIONAL MANUAL STATEMENTS .32TABLE 12: BANK RESOURCES: STAFF INPUTS (ACTUAL) .32TABLE 13: BANK RESOURCES: MISSIONS .33

AllENDICES:

A. ICR MISSION AIDE-MEMOIRE ............................. 36B BORROWER CONTRIBUTION TO THE ICR ............................. 46(. MAP(IBRD 22163)

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without.World Bank authorization.

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IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF INDONESIA

EAST JAVA BALI URBAN DEVELOPMENT PROJECT(Loan 3304-IND)

Preface

This is the Implementation Completion Report (ICR) of the East Java Bali Urban DevelopmentProject (Loan 3304-IND) in the Republic of Indonesia, for which US$180.3 million was approved on March19, 1991 and made effective on June 25, 1991.

The Loan was closed on September 30, 1997 after an extension of nine months from the originalclosing date of December 31, 1996. Final disbursement took place on February 9, 1998; the balance of US$7.3 million was canceled.

The ICR was prepared by Raja Iyer and Dong Liu (EASUR), Risyana Sukarma and Leila Elvas(EACIF), and Ephrem Asebe, consultant. It was reviewed by Messrs. Dennis de Tray, Country Director,Indonesia and Keshav Varma, Manager, Urban Development Sector Unit, East Asia and Pacific Region.

Preparation of this ICR began with the ICR mission in June-July 1997. It is based on: the findingsof the [CR mission; inputs provided by government officials at ICR workshops in Bali, East Java, andJakarta; data furnished by GOI and their consultants; and documents in the project file. It has benefited froma review of the Bank's decentralized urban portfolio in Indonesia (Review of the Bank's DecentralizedUrban Portfolio: Republic of Indonesia, by Alexandra Ortiz, dated August 29, 1997). Comments receivedfrom a number of persons (as well as the project executing agency) on a draft version have beenincorporated, as appropriate. The Borrower contributed to the preparation of the ICR by commenting on thedraft of the ICR and by providing an independent evaluation of the project's execution, which is shown inAppendix B.

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF INDONESIA

EAST JAVA -BALI URBAN DEVELOPMENT PROJECT.(Loan 3304-IND)

Evaluation Summary

Introduction

i. The Government of Indonesia (GOI) articulated its priorities for the urban sector in a Statement ofPolicies for Urban Management issued in 1987 and incorporated these policies in Repelita V, the fifthnational five-year plan, for the period 1989-94. Integrated Urban Infrastructure Development Programming(IUIDP), including inter alia, the preparation and implementation of integrated five year investmentprograms (PJMs) in seven sectors was the operational approach for achieving the objectives of the PolicyStatement. The Policy Statement, including IUIDP, became ajoint approach of GOI and the Bank toaddress urban development in the country. The East Java Bali Urban Development Project (EJB, Loan 3304- IND) was the flagship project under the IUIDP concept; the IUIDP approach was subsequently adopted byover 75% of the local governments, and became the basis for donor supported urban programs throughoutIndonlesia.

Project Objectives

ii. The fundamental objective of EJB was to improve the quality of the urban infrastructure investmentand service delivery in East Java and Bali. The operational objectives were to: (a) support urbaninfrastructure investment (including rehabilitation) in up to 45 local governments in East Java and Bali; (b)improve urban infrastructure expenditure programming, financial planning and information management inthese local governments; (c) encourage local revenue generation, improve finanicial management, andstrengthien local government human resources and institutions; and (d) assist sector development nation-wide, incliuding preparation of future projects.

iii. The objectives of the project were clear, and were consistent with goverillent policy and theBank's assistance strategy for addressihg urban sector priorities in Indonesia. East .lava and Bali provinceswere appropriate for testing and implementing the IUIDP approach, given their urban infrastructure needsand relatively well developed provincial and local government institutions. The SAR correctly identified thechief risk as slower than required pace of institutional development to successfully operationalize the newinitiatives piloted under the project. The loan covenants were generally useful in facilitating achievement ofproject objectives.

Implementation Experience and Results

iv. In the context of its pilot nature, and the complexities of the project described above, theachievements of the project are satisfactory. Economic benefits from the projeci are considered satisfactory.

v. Investments in water supply, urban roads, drainage, and solid waste management constituted themajor portion of the physical investments. The quantity and quality of works were generally satisfactory

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and the objectives of the investmentprogram were by and large achieved Infrastructure assets, especiallythose created under the project, were reasonably well maintained.

vi. The project substantially achieved the overarching objective of improving urban infrastructureprogramming, financialplanning, and information management in local governments Local governmentinvolvement in the preparation of PJMs varied in the two provinces, being in general much greater in Balithan in East Java. The follow-on projects were prepared in both provinces witlh the local and provincialgovernments taking the lead in program development. Thespecial grant mechanism, SPABP,operational ized under the project, provided an incentive to local governments to accept decentralization. Itbecame standard practice in all subsequent Bank urban projects and was adopted by other donors. includingthe Asian Development Bank. In the 1997/98 budget year, GOI took the next major step in decentralizationby channeling all of the urban infrastructure grants - rather than merely a part - directly to localgovernments. Other initiatives under this objective included implementing: (a) the borrowing mechanism ofsubsidiary loan agreements with pre-financing (SLAP); (b) the performance oriented maintenancemanagement system (POMMS), where progress was slow; and (c) the project finalncial accounting andmanagement system (PFAMS).

vii. The objective to encourage local revenue generation, improve financial management, andstrengthen local government human resources and institutions was substantially achieved. Revenueimprovement action plans (RIAPs) supported under the project were successful. The objective ofintroducing the concept of borrowing for urban infrastructure (and servicing debt) to the local governmentsof the two provinces was substantially achieved; recent appraisals of the follow-oni projects in bothprovinces confirmed the debt servicing capacity of the EJB sub-borrowers. Efforts to improve the financialmanagement of participating water enterprises were only partially successful; these issues are beingaddressed under the follow-on projects. The project contributed tostrengthening local governmentinstitutions in various aspects of IUIDP, primarily through learning on the job, with support from variousconsultants.

viii. The sector development objective was satisfactorily achievedas: (a) thle relevant phase of the lJNDPproject was very effective; and (b) the follow-on projects were almost entirely developed from EJB loanfunds.

ix. Project Cost and Financing. The cost of the implemented project (net of interest duringconstruction) was $405 million, about 12% higher than the original estimate. EJB loan financed $173million, about $7.3 million below the loan amount; the balance of financing was provided by various GO!agencies, except for $4.2 million provided by a Japan grant for technical assistance. The balance in theBank loan was canceled, as the urban infrastructure needs in the two provinces are being met by the follow-on projects. Currency rates were not a significant problem till June 1997, as by thien the rupiah value hadchanged from 1,900 to the dollar in January 1991 to about 2,400 to the dollar; however, by the closing date,the rupiah had depreciated to 3,275 to the dollar. The original loan closing date of December 31, 1996 wasextended by nine months to enable three major water supply sub-projects in Badung, Gresik, and Sidoarjo(which started late due to delay in availability of counterpart funds) to be completed.

x. Major Factors Affecting Project Implementation. Delay in finalizing procedures for the newfinancing mechanisms introduced in EJB, viz., SPABP and SLAP, affected project implementation duringthe first two years. Major factors affecting the project that were subject to implementing agency controlincluded delays in: (a) mobilization of key technical assistance packages to support program managemrent;(b) developing a reasonable operational understanding of the new roles and responsibilities of central,

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provincial, and local agencies; (c) availability of counterpart funding for the major water supply sub-projectsin Badung, Sidoarjo, and Gresik; and (d) establishing systems for progress reporting and project monitoring.The changes in macroeconomic conditions (and the drastic fall in the value of the rupiah) from July 1997had only a marginal impact on EJB, as by then the project had substantially been completed.

xi. Bank Performance. Bank identification of the project and assistance in its preparation wassatisfactory; EJB was a good vehicle to pilot the new strategy for urban development agreed between GOIand the Bank, viz., the IUIDP concept. Bank appraisal of EJB was comprehensive and thorough, anddiligently addressed all Bank requirements. Bank supervision of EJB was highly satisfactory. Acomprehensive mid-term review was carried out in February 1994 and produced an insightful analysis of theachievements and failures of the project, and included guidance for future action.

xii. Borrower Performance. Borrower performance was satisfactory, both in preparation andimplementation. Provincial and local governments, in general, were able to handle the additionalresponsibilities transferred to them, albeit with significant consultant support. Central government agencies,however, did not always recognize the importance of providing guidance, direction, and mentoring toprovincial and local governments in the new decentralized environment. The generally positive response ofmost key government officials to specific cases of concern - in sub-project appraisal, procurement,construction quality, 0 & M, need for improved environmental management, etc. - provided room forguarded optimism on most such matters. These issues require on-going attention from government, anddemonstrating improved results in the follow-on projects will be a key challenge for GOI.

xiii. Project outcome. The project achieved most of its stated objectives, in particular, the overarchingobjective of initiating a paradigm shift from central to local responsibility for urban infrastructure.Sustainability of project benefits is, however, uncertain in the short run in view of the severe adversechanges in the country's macroeconomic situation.

Summary of Findings, Future Operations and Key Lessons Learned

xiv. Findings. EJB made a signal contribution in operationalizing the decentralization objectives ofGOI's Urban Policy Statement. The IUIDP approach was a major departure from earlier sectoralapproaches, recognized that urban management was necessarily multi-sectoral and complex, and attemptedto get urban managers to prepare PJMs for urban infrastructure sectors by allocating the available limitedresources optimally between sectors. In practice, integrated planning made a good start at the global (i.e.,citywide) level, but at the detail level planning remained sectoral. A further drawback was the inadequateattention to preparing sectoral master plans as the basis for investment programs, and a tendency to focusinstead on short term needs on an ad hoc basis. Finally, as anticipated in the SAR, EJB did not advance thesectoral agenda in the individual sectors, water supply being a noteworthy example.

xv. Future Operation. Assets created by EJB will be operated and maintained by the respective localgovernments and PDAMs. Bank supervision missions for the two follow-on projects will monitor progresson performance indicators developed for those projects which, inter alia, address issues such as watersupply finance, 0 & M, and local government capacity, which are relevant to EJB.

xvi. Key Lessons Learned. The lessons for future Bank project interventions flow from the lendingstrategy articulated in the SAR and the EJB experience, highlighted in the mid-tern review. These wouldargue for future urban projects to be in the following categories: (a) programmatic packages, limited to thesmaller urban centers in at most a single province; (b) projects for municipal local governments of the lRrc-?

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cities (kotamadya) and the surrounding peri-urban districts (kabupatens); and, (c) sectoral projects in thelarger metropolitan centers, e.g., Jakarta, Surabaya, Medan, Bandung, based on overall infrastructuredevelopment plans of the metro city.

xvii. Municipal development projects, focusing on capacity building for urban management andimproved infrastructure service delivery in sectors under direct local government management, would likelybe the appropriate vehicles for projects described in paragraph xvi (a) and (b). In the case of water supply,decentralization of investment programs from Cipta Karya to PDAMs has largely been achieved throughEJB (and subsequent urban projects). The focus should now be on the major reforn agenda for the sector toimprove (efficiency of) service delivery - institutional changes, financing options, private sectorparticipation - outlined in the October 1997 Bank paper (Indonesia: Urban Water Supply Sector PolicyFramework, Indonesia Discussion Paper Series, No. 9) and adopted by GOI. This would be best achievedthrough free standing water supply projects.

IMPLEMENTATION COMPLETION REPORTREPUBLIC OF INDONESIA

EAST JAVA BALI URBAN DEVELOPMENT PROJECT(LOAN 3304-IND)

PART I: IMPLEMENTATION ASSESSMENT

A. STATEMENT/EVALUATION OF OBJECTIVES

1. Background. The Government of Indonesia (GOI) articulated its priorities for the urban sector in aStatement of Policies for Urban Management issued in 1987 and incorporated these policies in Repelita V,the fifth national five-year plan, for the period 1989-94. The Policy Statement emphasizes: (a) strengtheninglocal governments to assume the leading role in developing, operating and maintaining local services; (b)improving the planning and programming of urban infrastructure services; (c) revising grant flows,mobilizing local revenues, and optimizing their use; (d) implementing a coordinated financing system for thedevelopment and administration of local services; and (e) strengthening consultations between various levelsof government, especially the participation of local governments. Integrated Urban InfrastructureDevelopment Programming (IUIDP), including inter alia, the preparation and implementation of integratedfive year investment programs (PJMs) in seven sectors - water supply, drainage, solid waste management,sanitation, urban roads, neighborhood improvement program (KIP), and market infrastructure improvementprogram (MIIP) - was the operational approach for achieving the objectives of the Policy Statement.

2. The Policy Statement, including IUIDP, became a joint approach of GOI and the Bank to addressurban development in the country. The East Java Bali Urban Development Project (EJB, Loan 3304 - IND)was the flagship project under the IUIDP concept; the IUIDP approach was subsequently adopted by over75% of the local governments, and became the basis for donor supported urban programs throughoutIndonesia.

3. Project Objectives. The fundamental objective of EJB was to improve the quality of the urbaninfrastructure investment and service delivery in East Java and Bali. The operational objectives were to: (a)support urban infrastructure investment (including rehabilitation) in up to 45 local governments in East Javaand Bali; (b) improve urban infrastructure expenditure programming, financial planning and informationmanagement in these local governments; (c) encourage local revenue generation, improve financialmanagement, and strengthen local government human resources and institutions; and (d) assist sectordevelopment nation-wide, including preparation of future projects.

4. Project Components. The project comprised the following three principal components: (a)infrastructure development, rehabilitation, and operations and maintenance (O&M), through a five-yearexpenditure program in the IUIDP sectors (US$340 million, 94.4% of total project costs); (b) programmanagement, to support further program and sub-project preparation, and for management of programimplementation (US$ 15.0 million, 4.2% of project costs); and (c) institutional development, comprisingmunicipal management improvement and sector development ($5.0 million, 1.4% of project costs).

5. Evaluation of Objectives. The objectives of the project were clear, and were consistent withgovernment policy and the Bank's assistance strategy for addressing urban sector priorities in Indonesia.The project provided GOI and the Bank an opportunity to pilot the IUIDP approach through financinginvestments serving both economic and social needs. East Java and Bali provinces were appropriate for.testing and implementing the IUIDP approach, given their urban infrastructure needs and relatively well

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developed provincial and local government institutions. The Staff Appraisal Report (SAR) correctlyidentified the chief risk as slower than required pace of institutional development to successfullyoperationalize the whole series of new initiatives - decentralization, local revenue improvements, localborrowing, implementation of a performance oriented maintenance managemenit system (POMMS), etc. -piloted under the project.

6. Project design was complex at three levels: sectoral (see paragraph I); geographical (see paragraph3); and institutional (involving three levels of government - central, provincial, and local - with multipleagencies at each level). When coupled with the new initiatives indicated in paragraph 5, their impact on theproject was considerably magnified. The sectoral and institutional coYnplexity was. however, unavoidable inthe context of decentralizing urban infrastructure investments through existing institutional channels.

7. Covenants. The loan covenants were generally useful in facilitating achievement of projectobjectives. The covenant on 0 & M expenditure could have been better formulated to measure physicalimprovements in 0 & M. The financial covenants for full cost recovery for water supply within the projectperiod did not anticipate the difficulties in implementing them in the absence of suitable incentives to thelocal governments and their water enterprises.

B. Achievement of Project Objectives

8. Overall Assessment. In the context of its pilot nature, and the complexities of the project describedabove, the achievements of the project (which are described below) were satisfactory.

Objective A: Urban Infrastructure Investment, Rehabilitation, and 0 & M

9. Infrastructure investments, and 0 & M constituted about 88.6% of the implemented project.Investments in water supply, urban roads, drainage, and solid waste management constituted the majorportion of the physical investments. Table 5 provides details of targeted and actual investments in the twoprovinces by sector. (The significant variations are due to the programmatic nature of the project; atappraisal, investment volumes were estimated, based on assessments of the investments in the first batch oflocal governments. Actual investments reflect the changed conditions and the priorities at the time offinalizing annual development programs.) Based on the findings of the ICR mnission and various supervisionmissions, the quantity and quality of works were generally satisfactory and the objectives of the investmentprogram were by and large achieved.

10. Water Supply. Water supply investments were made in 14 water enterprises (PDAMs) in East Javaand eight PDAMs in Bali. Investments planned in Surabaya were transferred to the Surabaya UrbanDevelopment Project (Loan 3726 - IND); some of the investments in Badung were implemented outside theproject through ajoint venture between private investors and PDAM Badung. The project generallyachieved its targets of water production and service connections; detailLs of project achievements on numberof connections, volume of water produced and sold, and percentage of unaccounted for water, are containedin Table 6A. The quality of major facilities constructed under the project (in Badung, Sidoarjo, and Gresik)was good. Improper alignment and inappropriate pipe material, combined with an unexpected flash flood,resulted in the project financed transmission main for PDAM Klungkung in Bali being washed away.Following Bank review of the report of a government inquiry, the transmission main was rebuilt using steelpipes along a different alignment.

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II. Urban Roads. Investments in urban roads mainly comprised widening within existing rights ofway, strengthening the pavement, incorporating drains, and providing sidewalks; a few sub-projectsinvolved the construction of new roads. Quality of road works was generally good. Road surfaces were forthe most part smooth, with well compacted asphalt. In general, openings through the curbs to drains weresatisfactory, with some examples of good detail in screened openings. Sidewalks, constructed as part ofroad sub-projects, have improved pedestrian safety; they were designed and built higher than normal toavoid their use ]for parking.

12. Solid Waste Management. During the early stages of the project, good standards were notconsistently achieved in site selection, development and operation of landfills. Supervision missionsconcentrated on these aspects, and landfills inspected in both East Java and Bali during the ICR missionindicate much better management, with minimal apparent impact on the environment. The contrast betweenthe landfill at Canggu (in Badung) and Suwung (in Denpasar) in Bali is stark: the former was built with dueregard to environmental considerations, while the latter was not financed from loan funds as repeated Bankadvice to construct an environmentally safe landfill were not accepted. Transfer stations financed under theproject were well constructed and properly maintained, with the station in Singaraja being a particularlygood model.

13. Other Sectors. The larger drainage works inspected were built to an acceptable standard.Maintenance however needs to be improved - both desilting and patching up of cracks. Most of the projectworks in human waste were small. The septage treatment plant (IPLT) in Denpasar was well laid out,satisfactorily constructed, and is one of the few working septage plants in Indonesia. The sub-projects in thesmall KIP and MIIP project components were generally well implemented.

14. Operations and Maintenance (O & M). Bank supervision missions (including the ICR Mission)found that infrastructure assets, especially those created under the project, were reasonably well maintained;however, as with 0 & M in local governments in developing countries around the world, there is scope forfurtlher improvement. 0 & M should be addressed on a systematic and on-goinig basis. (See Para. 20 onPOMMS.) It was heartening to listen to government officials at all levels emphasizing the importance of 0& M at the provincial and national ICR workshops. Data presented in Table 6C compares PJM 0 & Mtargets and implemented expenditures, and indicate a very favorable picture overall; however, these shouldbe read with caution, as both the system for estimating targets and the one for compiling actual expenditureneed improvement. (See paragraph 20.)

Objective B: Improve Urban Infrastructure Expenditure Programming, Financial Planning, andInformation Management in Project Local Governments

15. This overarching project objective sought to initiate a dramatic paradigm shift in urbaninfrastructure through principally: (a) significant decentralization of urban infrastructure to localgovernments through local preparation of PJMs; (b) operationalizing a new grant mechanism (SPABP) tochannel a part of the loan proceeds to local govenmments for local management of implementation of a partof the PJMs; and (c) operationalizing a new loan facility (subsidiary loan agreements with pre-financing -SLAP) to on-lend a part of the loan proceeds to local governments at real interest rates.

16. The project faced major start-up problems in its initial years; nevertheless, by the end of the project,progress was substantial. However, much remains to be done in building local capacity in these areas andwill require on-going government and Bank support to build on the gains of the project. On balance, thisobjective can be considered as substantially achieved.

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17. Urban Infrastructure Programming. Local government involvement in thie preparation of PJMsvaried in the two provinces, being in general much greater in Bali than in East Java. The original PJMs werethus implemented in Bali with relatively few major changes, whereas in East Java more changes were madeduring annual program reviews, as the provincial government and the local governments took greater controlof the East Java programs. (This accounts, in part, for the variation in Table 5 between targets andachievements.) Overtime, the respective roles of local, provincial, and central agencies became betterunderstood, and decentralization has taken stronger root in both provinces. It is nioteworthy thatfollow-onprojects were prepared in both provinces (the Bali Urban Infrastructure Project - BUIP (Ln. 4155-IND),and the Second East Java Urban Development Project - EJ2 (Ln. 401 7-IND1 wtith the local and provincialgovernments taking the lead in program development, the central governmentrs role in these follow-onprojects was limited to providing overall direction and guidance. Considerable consultant support was stillrequired in both provinces to prepare these follow-on projects, and the process was not always smootlh,especially in East Java.

18. The SPABP Mechanism. Operationalization of the SPABP grant mechlan ism provided an incentiveto local governments to accept decentralization by transferring responsibility to the local level for planning,budgeting, financing, and implementing a portion of central government funding for local investments.After significant delays of nearly nine months in the flow of funds in the first year, the annual SPABPprocess accelerated somewhat. The SPABP mechanism became standard practice in all subsequent Bankurban projects and was adopted by other donors, including the Asian Development Bank (ADB). In the1997/98 budget year, GOI took the next major step in decentralization by channlelinig all of the urbaninfrastructure grants - rather than merely a part - directly to local governments.

19. The SLAP Mechanism. The majority of the participating local governments and PDAMs borrowedfunds from the proceeds of the Bank loan through the SLAP mechanism to finance a part of their investmentprograms. (See also paragraph 22.) The SLAPs incorporate "real" interest rates. However, operationalizingthe SLAP mechanism (after due review and clearance of the new procedures by the various centralgov rmment agencies) took time, delaying transfer of funds for the relevant sub-projects. The SLAP hassince been refined in more recent urban projects, with the pre-financing requirement being dropped; interestrates remain "real", but are not yet at market levels.

20. POMMS. Progress in installing and implementing the POMMS system was slow; the principalproject accomplishment was the preparation of a comprehensive inventory of assets and their condition, andproviding forecasts of future maintenance needs. The system installed was, lhowever, too elaborate;inventories of infrastructure assets compiled under the project could soon become obsolete, if they are notregularly updated. Local government use of POMMS varied, depending on the commitment of keymanagers to provide the requisite staff and computing equipment to maintain the systems up-to-date. Theplanned changes to the government budgeting system, which will make it easier to obtain reliable data on 0& M expenditures in future, will be a positive development.

1. Project FinancialAccounting and Management System (PF4MS). PFAMS was installed andoperated in all participating local governments after initial teething troubles and produced regular andreasonably timely provincial level financial information on project implementation progress. However, itdid not become an effective program management tool for local governments; it also did not workeffectively at the central level. The central project management organization (CPMO) of the executingagency monitored technical assistance and produced consolidated financial reports on an ad hoc basis.PFAMS is, however, being implemented at the provincial level in BUIP and EJ2.

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Objective C: Encourage Local Revenue Generation, Improve Financial Management, andStrengthen Local Government Human Resources and Institutions

22. Local Revenue Generation. Revenue improvement action plans (RIAPs) supported under theproject were successful, and the local revenue generation target was substantially achieved Table 6Bshows that the realized growth rates in 1996/97 in the East Java and Bali local governments comparefavorably with targets. RIAP remains an important element of the follow-on projects in East Java and Bali.The Ministry of Home Affairs considers East Java and Bali to be at the forefront of RIAP development, andproposes to use the systems and documentation in East Java and Bali as a model.

23. Local Government Borrowing. The objective of introducing the concept of borrowing for urbaninfrastructure (and servicing debt) to the local governments of the two provinces was substantially achieved.Of the local govemments that had a significant participation in the project, all 22 in East Java and three (ofnine) in Bali received a portion (the amount being determined by their respective borrowing capacities) ofthe proceeds of the Bank loan as an on lent sub-loan from the central government. Recent financialprojections (reviewed during the appraisals of BUIP and EJ2) for these local governments confirm that netrevenues in each case will be sufficient (in most cases by a very substantial margin) to meet the covenanteddebt service coverage ratio of 1.5.

24. Financial Status of PDAMs. Financial performance of PDAMs participating in the project wasmixed, as shown in Table 6. In general tariff increases were too little and too late to meet the financialcovenants of full cost recovery by March 1994. Only nine out of twenty two participating PDAMsgenerated sufficient revenues in 1996 to meet operating costs and depreciation; five failed to recoveroperating costs. Both BUIP and EJ2 require participating PDAMs (which include some EJB PDAMs) toachieve full cost recovery; government and Bank missions will also monitor progress of other EJB PDAMsin the two provinces in this regard.

25. Strengthening Local Governments. The project contributed to strengthening local governmentinstitutions in various aspects of IUIDP, primarily through learning on the job, with support from variousconsultants. (Specialized technical assistance, originally planned for implementing local institutionaldevelopment action plans - LIDAPs - did not materialize.) Progress was good in urban infrastructureplanning, appraisal, programming, improved financial planning, increased local revenue generation, etc.Greater efforts are needed in 0 & M, financial management of water enterprises, and strengtheningenvironmental management capacity. Capacity building at the local level is an on-going process and isbeing addressed under BUIP and EJ2.

26. Capacity building in environmental management had only a limited success in EJB; however, theexperience was instructive and has gathered momentum in BUIP and EJ2. In Bali, an umbrellaenvironmental monitoring and management plan (EMMP) is being implemented, and is serving as a modelfor other urban and transport projects in Indonesia. In East Java, a much more practical environmentalmanagement training program has been designed in consultation with provincial environmental staff and theprovincial agencies are actively involved in screening proposed investments and reviewing environmentaldocuments.

27. Local Government Financial Accounting and Management. Technical assistance for a special studyto continue the development (started under earlier Bank financed projecis) and implementation of improvedfinancial systems in local governments (on a national basis) did not have the desired impact. The work tocomplete system design, pilot testing and full adoption in a selected local government (Kabupaten Bogor,

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near Jakarta) was considerably delayed; efforts on a parallel run of the new system in East Java and Baliwere unsuccessful owing, apparently, to insufficient government support.

Objective D: Assist in Sector Development

28. EJB assisted sector development in the country through co-financing (with UNDP) technicalassistance for implementation support for IUIDP throughout the country and in the preparation of futureBank urban projects. The sector development objective was satisfactorily achieved as: (a) the relevantphase of the UNDP project was very effective; and (b) BUIP and EJ2 were alnost entirely developed fromLoan 3304-lND funds, and partial support was also provided for completing the preparation and appraisal ofthe Surabaya and Kalimantan Urban Development Projects.

29. Project Cost and Financing. The cost of the implemented project (net of interest duringconstruction) was $405 million, about 12% higher than the original estimate. EJB loan financed $173million, about $7.3 million below the loan amount; the balance of financing was provided by various GOIagencies, except for $4.2 million provided by a Japan grant for technical assistance. The balance in theBank loan was canceled, as the urban infrastructure needs in the two provinces are being met by the follow-on projects. Currency rates were not a significant problem till June 1997, as by then the rupiah value hadchanged from 1,900 to the dollar in January 1991 to about 2,400 to the dollar; however, by the closing date,the rupiah had depreciated to 3,275 to the dollar. The original loan closing date of December 31, 1997 wasextended by nine months to enable three major water supply sub-projects in Badung, Gresik, and Sidoarjo(which started late due to delay in availability of counterpart funds) to be completed.

Economic Rate of Return

30. Economic benefitsfrom the project are considered satisfactory. Economic internal rates of return(EIRR) were recalculated during the ICR exercise for a sarnple of medium sized roads and drainage sub-projects in the two provinces; barring two outliers, the recalculated EIRRs were above the SAR threshold of10%. Recalculated EIRRs of water supply investments in East Java indicate that the returns wereacceptable; the exceptions are Sidoarjo and Gresik, where the benefits of the investment program were notrealized as required non-project investments to bring water from Umbulan springs were not made.Economic returns of the Bali water supply investments were considered acceptable, as the targets set atappraisal, e.g., water sold, investment and operating costs, were largely met; the financial rates of returnwere, however, negative for the most part, owing to a failure to increase tariffs to the required levels.Investments in the other sectors were considered economically acceptable based on their following agreedtechnical criteria and least cost solutions. Table 9 and its attachment provide further details on economicanalysis.

Evaluation of Program Objective Categories

31. Poverty Impact. Given the low levels of poverty in East Java and Bali (8.8% and 12.3%respectively), the project was not a targeted poverty intervention. Drainage, KIP, and public stand pipesbenefited the poor directly through protection from flooding and improved provision of basic services. Anindirect positive impact on poverty was the involvement of unskilled local labor in the many small civilworks contracts obtained by local contractors.

32. Local Participation. EJB made a significant contribution to shifting the locus of responsibility forurban infrastructure from the central government to local governments through the IUIDP process.

7

Beneficiary households and communities were involved in the identification, preparation, andimplementation of KIP and MIIP, as well as in public water supply standpipes. Progress has continued inBUIP and EJ2, where local governments developed the first cut investment programs. Greater involvementof communities in all sectors is also a feature of the follow-on projects. GOI's decision in early 1997 totransfer all development funding for urban infrastructure directly to the local governments further enhancedlocal participation and increased the potential for greater community participation.

33. Environmental Management. EJB was technically not subject to OD 4.00 Annex A; however,environmental assessments (EA) were conducted on the basis of GOI AMDAL procedures (initially under a1986 regulation, and later under a presidential decree issued in 1993). The substantial amount of effortdevoted to EA in EJB contributed to the environmental soundness of the sub-projects, as designed.However, agencies implementing the sub-projects did not fully follow through on the recommendations ofthe environmental management and monitoring plans because: (a) the training provided was neither timelynor fully relevant; and (b) it was difficult for provincial governments to interact with the central agenciesresponsible for review and approval of environmental assessments. In BUIP and EJ2, timely environmentaltraining is being emphasized, environmental studies are the responsibility of the sub-project proponents,-andthe provincial governments have the lead role in reviewing environmental documents, and overseeingimplementation of AMDALs.

34. Land Acquisition and Resettlement. Given the emphasis on rehabilitation and upgrading of existinginfrastructure, EJB did not require significant land acquisition and no known or reported resettlement.Where required, compensation was provided to affected persons according to agreed guidelines.

35. Private Sector Participation (PSP). The private sector participated in EJB through the provision ofcontractual services for civil works, goods, and consultant services. EJB did not envisage any private sectorparticipation in either financing or management of infrastructure services in the two provinces. However, ajoint venture company between private investors and PDAM Badung financed the extension of water serviceto the Nusa Dua resort area in Bali. (In the Bank's view, the terms could have been more favorable toPDAM Badung.) BUIP envisages substantial PSP (on a competitive basis), in both water supply and solidwaste management. PSP opportunities in water supply and solid waste management are also being exploredin EJ2.

C. Major Factors Affecting Project Implementation

36. Factors not generally subject to government control. All factors of significance to the projectwere generally subject to either govermment or implementing agency control.

37. Factors generally subject to government control. The major factor affecting EJBimplementation, that was subject to government control, was the delay in finalizing procedures for the newfinancing mechanisms introduced in EJB, viz., SPABP and SLAP. The changes in macroeconomicconditions (and the drastic fall in the value of the rupiah) from July 1997 had only a marginal impact onEJB, as by then the project had substantially been completed.

38. Factors subject to implementation agency controL Major factors affecting the project that weresubject to implementing agency control included the following:

(a) Technical Assistance. Mobilization of key technical assistance packages to support programmanaaement at provincial and local levels was delayed by as much as 18 months, affecting implementation

8

(e.g., the Klungkung transmission pipe design and installation was not subjected to a sufficiently carefulreview) and capacity building efforts. Inadequate management of TA packages further limited the impact ofa number of packages.

(b) Program coordination. Because of the newness of the IUIDP concept, it took some time beforethere was a reasonable operational understanding of the new roles and responsibilities of central, provincial,and local agencies under EJB. Even central government agencies sometimes began implementation of largesub-projects without consulting the executing agency regarding the required feasibility study and appraisal,e.g., the Lamongan Ring Road sub-project (which was subsequently excluded from EJB). Coordination wasparticularly difficult in the large East Java province.

(c) Delay in availability of counterpartfunding. The major water supply sub-projects in Badung,Sidoarjo, and Gresik were affected by such delays, which in turn were responsible for the nine monthextension of the project closing date.

(d) Progress reporting andproject monitoring Proper systems were not in place for nearly twoyears, owing to delayed consultant mobilization. Institutional weaknesses in the program (financial)management arm of Cipta Karya, the executing agency, affected consolidated financial reporting throughoutthe life of the project.

D. Project Sustainability

39. Project sustainability is considered uncertain, and is linked to the pace of improvements in theoverall economy and sustained assistance from central government to strengthen the capacity of localgovernments. GOI commitment to decentralization of urban infrastructure, as demonstrated through variouspolicy decisions, and a growing appreciation (at even local government levels) of tlhe importance ofeconomic, technical, financial, and environmental considerations in selecting urbani infrastructureinvestments, are important factors that affect sustainability favorably. BUIP and EJ2, the follow-on projectsin the two provinces, provide the Bank and the government (central, provincial, and local) an opportunity tobuild on the achievements of EJB, and focus further efforts on full cost recovery in water supply and onfurther improvements to 0 & M. Difficulties experienced in the start-up of EJ2 confirm the need forsustained institutional development efforts to enable local governments to meet the greater responsibilitiesthat have been given to them. The adverse change in Indonesia's macroeconom ic situation since July 1997could, if it persists for an extended period, result in deferral of the required water supply tariff increases andcutbacks in needed 0 & M outlays.

E. Bank Performance

40. Bank identification of the project was satisfactoryas EJB was a good vehicle to pilot the newstrategy for urban development agreed between GOI and the Bank, viz., the IUIDP concept. Bankassistance in the preparation of EJB was, on the whole, satisfactory. It included support for extensivetraining in IUIDP and for the development of the investrnent program. Bank staff and consultants,representing a wide range of required skills, provided guidance to GOI and their consultants through regularpreparation missions. The project team recognized the inherent complexity in the design of this pilotproject; however, the options of simplifying either the sectoral or the geographical scope were notconsidered feasible. The former (e.g., excluding water supply) would have meant not decentralizing watersector investments, while the latter (e.g., excluding Bali province) was unacceptable to government.

9

41. Bank appraisal of EJB was satisfactory. It was comprehensive and thorough, and diligentlyaddressed all Bank requirements. The structured approach to economic analysis and the adoption of aprogrammatic approach to the development and appraisal of the investment programs of the second andthird batches of local governments (see attachment to Table 9) were appropriate. The chief risk of the paceof institutional change being slower than required was correctly identified, but was considered minimal inlight of the relative sophistication of the provincial governments. Financial analysis of PDAMs adopted thestandard Bank approach of full cost recovery, which in practice proved too optimistic, particularly asincentives to ensure compliance of individual PDAMs to loan covenants were not built in, e.g., throughtieing them in to loan disbursements to the corresponding local governments through annual reviews. Aspecial feature of the appraisal was that the entire Bank team was proficient in (at least) spoken Indonesian,which greatly facilitated substantive discussions with local governments.

42. Bank supervision of EJB was highly satisfactory. Supervision missions generally contained theappropriate mix of skills, identified and resolved key issues in a timely fashion, and assessed developmentimpact regularly. The Task Manager during the initial years of implementation and the (municipal) financialanalyst, who were key members of the preparation and appraisal teams, provided essential continuity andwere responsible for working with government to resolve a variety of start-up problems. Given thegeographic spread and the number of sectors involved, supervision of physical works was undertaken on asample basis, focusing on major or sensitive sub-projects. Supervision missions identified and helpedrectifv a number of implementation problems e.g., Canggu landfill, Denpasar septage plant, water supplysub-projects in Gianyar, Sidoarjo and Gresik, and the Lamongan Ring Road. A comprehensive mid-termreview was carried out in February 1994 and produced an insightful analysis of the achievements andfailures of the project, and included guidance for future action; these have also contributed to the section onlessons learned (paragraphs 52-56).

43. One of the main reasons for the effectiveness of EJB supervision was the substantial use of staff(local and international) from the Resident Staff in Indonesia (RSI). RSI staff were involved from thebeginning on NCB procurement, disbursement, and sample reviews of statements of expenditure (SOEs).After the mid-term review, an RSI engineer was assigned as RSI Lead Person for EJB to maintain regularcontact with project agencies and provide advice and guidance as required. The Lead Person also carriedout brief site visits between main Bank missions to supervise progress of physical works.

44. Supervision costs of about $0.5 million were appropriate, given the pilot nature of EJB, theinnovations introduced, and the project's complexity. An important factor to be borne in mind is the largesize of the project - about the equivalent of two to three typical sectoral projects.

F. Borrower Performance

45. Borrower performance in EJB has to be assessed in the context of the operationalization of a newconcept over three levels of government, spread over a wide geographical setting, in seven sectors. Onbalance, Borrower performance was considered satisfactory, both in preparation and implementationProvincial and local governments, in general, were able to handle the additional responsibilities transferredto them, albeit with significant consultant support; local government performance, understandably, variedconsiderably. Central government agencies did not always recognize the importance of providing guidance,direction, and mentoring to provincial and local governments in the new decentralized environment.

46. Some of the problems encountered during implementation were generic to urban services in thedeveloping world, e.g., need for further improvement in 0 & M, and difficulties in ensuring full cost

10

recovery for water supply. Others were generic to the Indonesia portfolio, e.g., excessive delays in selectionof consultants and ineffective consultant management. The generally positive response of most keygovernment officials to specific cases of concern - be it sub-project appraisal, procurement, constructionquality, 0 & M, need for improved environmental management - provided room for guarded optimism onmost such matters. However, these issues require on-going attention from government. Institutionalizingthese matters and demonstrating improved results under BUIP and EJ2 will be a key challenge for GOI.

47. As shown in Table 10, compliance with loan covenants was generally satisfactory. Inadequateappreciation of, and insufficient commitment to, the financial covenants in water supply on the part of theheads of local governments and the local legislatures, and lack of direction and enforcement from centralgovernment, appear to be the main reason for the partial compliance (i.e., full compliance by only some ofthe participating PDAMs) in this key area.

48. Government agencies (mainly at the central level) were unable to meet agreed target dates for theselection and mobilization of consultants for the 33 TA packages in EJB. Managemnent of TA also neededimprovement.

G. Assessment of Outcome

49. Project outcome is assessed as satisfactory. The project achieved most of its stated objectives (seeSection B), in particular, the overarching objective of a paradigm shift (articulated in the Policy Statement)from central to local responsibility for urban infrastructure. Physical investments under the project haveadequate rates of return. Sustainability of project benefits is, however, uncertain in the short run in view ofthe severe adverse changes in the country's macroeconomic situation (see Section D).

H. Future Operation

50. Assets created by EJB will be operated and maintained by the respective local governments andPDAMs. Bank supervision missions for the two follow-on projects will monitor progress on performanceindicators developed for these projects which, inter alia, address issues such as water supply finance, 0 &M, local government capacity, which are relevant to EJB.

51. EJB and four other Bank IUIDP projects - the Sulawesi Irian Jaya Urban Development Project; theSurabaya Urban Development Project; the Semarang Surakarta Urban Development Project; and theKalimantan Urban Development Project - constitute the cohort of five first generation Bank IUIDP projectsin Indonesia. These projects together provide the Bank a unique opportunity to assess the impact of IUIDPin a variety of large and small urban settings across Indonesia, and in projects of differing technicalsophistication and geographic spread. OED may, therefore, consider conducting an impact evaluation studyof these projects in the year 2,001 (by which time all these projects would have closed) along the lines of its1995 study on KIP, entitled, "Indonesia: Impact Evaluation Report, Enhancing the Quality of life in UrbanIndonesia, the Legacy of the Kampung Improvement Programn" (Report No. 1 4747-IND). If agreement canbe reached with the ADB, the study could be conducted jointly with ADB and could include ADB projectsas well.

I. Key Lessons Learned

52. EJB made a signal contribution in operationalizing the decentralization objectives of GOI's UrbanPolicy Statement. The IUIDP approach was a major departure from earlier sectoral approaches to

II

addressing urban infrastructure services. It recognized that urban management is necessarily multi-sectoraland complex, and attempted to get urban managers to prepare PJMs for urban infrastructure sectors byallocating the available limited resources optimally between sectors. In practice, while integrated planningmade a good start at the global (i.e., citywide) level, at the detail level planning remained sectoral. A furtherdrawback was the inadequate attention to preparing sectoral master plans as the basis for investmentprograms, and a tendency to focus instead on short term needs on an ad hoc basis. Finally, as anticipated inthe SAR, EJB did not advance the sectoral agenda in the individual sectors, water supply being a noteworthyexample.

53. The key issue for the future is to determine the optimal packaging of urban infrastructureinvestments as Bank projects. The lessons for future Bank project interventions flow from the lendingstrategy articulated in the SAR (paragraph 2.25) and EJB experience, highlighted in the mid-term review.Programmatic lending operations would be appropriate for selected areas with adequate institutionalcapacities, and projects with a more focused approach on some sectors would be more appropriate eitherwhere institutional capacities are too weak for programmatic lending (e.g., Eastern Indonesia) or where thesub-sectoral requirements are large and complex (e.g., metro Jakarta). Taken together with the EJBexperience on geographic dispersion, this would argue for future urban projects in the following categories:

(a) Programmatic packages, limited to the smaller urban centers in at most a single province.

(b) Projects for municipal local governments of the larger cities (kotamadya) and the surroundingperi-urban districts (kabupatens).

(c) Sectoral projects in the larger metropolitan centers, e.g., Jakarta, Surabaya, Medan, Bandung,based on overall infrastructure development plans of the metro city.

54. Municipal development projects, focusing on capacity building for urban management andimproved infrastructure service delivery in sectors under direct local government management, would likelybe the appropriate vehicles for projects described in paragraph 53 (a) and (b).

55. Water supply. Water supply presents an interesting special case. Now that the decentralization ofinvestment programs from Cipta Karya to the PDAMs has largely been achieved through EJB (andsubsequent urban projects), it is time to focus on the major reform agenda for the sector to improve(efficiency of) service delivery - institutional changes, financing options, private sector participation -outlined in the 1997 Bank paper (Indonesia: Urban Water Supply Policy Framework) and adopted by GOI.This would be best achieved through free standing water supply projects. (Other sectors with potential for atleast partial cost recovery, e.g., solid waste management, sewerage, would over time, also benefit from asectoral approach.)

56. Other lessons from EJB include: (a) continuation of efforts to strengthen local government financialmanagement by requiring them to finance future urban infrastructure investments through a combination offunds from own revenues, and central government grants and soft loans, complemented by local governmentborrowing at rates progressively linked to the market; (b) providing incentives for improving 0 & M on theground, by instituting national and/or provincial level awards for 0 & M (similar to the current Adipuraawards), citizen score cards on services, etc. under future projects; (c) requiring a stricter project focus forTA, keeping the number of TA packages to an absolute minimum, and targeting selection of priorityconsultants by loan effectiveness as a "quality at entry" performance indicator; and (d) continuing theextensive use of RSI staff in all urban projects in Indonesia.

12

IMPLEMENTATION COMPLETION REPORTINDONESIA

EAST JAVA BALI URBAN DEVELOPMENT PROJECT(Loan 3304-IND)

PART II: STATISTICAL ANNEXESANNEX A: STATISTICAL TABLES

Table 1: Summary of Assessment

A. Achievement of objectives Substantial Partial Negligible Not applicableMacroeconomic policies 5 5 5 XSector policies X E E lFinancial objectives E X 5 5Institutional development 5 X 5 5Physical objectives X I--] L iPoverty reduction L X ElGender concerns Oi O O XOther social objectives Li El X [1Environmental objectives O X 5 OPublic sector management 5 X 5 5Private sector development O 5 X 5Economic benefits 5 X E O

B. Project Sustainability Likely Unlikely UncertainOi El x

C. Bank Performance HighlySatisfactory Satisfactory Deficient

Identification L X EPreparation assistance 5 X 5Appraisal Fl X LISupervision X Li El

D. Borrower Performance HighlySatisfactory Satisfactory Deficient

Preparation 5 X 5Implementation 5 X ElCovenant compliance 5 X OOperation 5 X 5

E. Assessment of outcome Highly HighlySatisfactory Satisfactory Deficient Unsatisfactory

Li x OI °I

13

Table 2: Related Urban and Water Supply Bank Loans

Loan/credit title Purpose Year of Statusapproval

Precedingoperations*Fourth Urban To implement a nationwide KIP, a sites and services program, and to 1981 ClosedDevelopment Project strengthen the management capabilities of Bank Tabungan Negara(Loan 1972-IND) (BTN) and PERUMNAS.Fifth Urban To improve basic urban services and strengthen municipal administration 1984 Closed|Development Proje(ct in the project cities (Surabaya, Semarang, Surakarta, and Ujung Pandang)(Loan 2408-IND) and augment the capacity for local resource mobilization.Housing Sector Loan To expand access to housing finance for low and middle income 1986 Closed(Loan 2725- IND) households; to reduce overall subsidies to the lowest income groups; to

reduce the reliance of the housing finance system on government fundsand introduce new instruments for resource mobilization; to stimulate theproduction of more low cost housing by both public and privatedevelopers; to generate employment and to strengthen BTN andPERUMNAS.

Urban Sector Loan To carry out GOI's FY87/88 and FY88/89 urban infrastructure 1987 Closed(Loan 2816-IND) expenditure program; to strengthen sector institutions and procedures; to

improve local resource mobilization; and to increase the responsibilitiesof local governments for urban infrastructure planning, financing andimplementation. l

Regional Cities To implement a program for relieving traffic congestion and promote 1987 ClosedUrban Transport transport efficiency; to strengthen city govermment capabilities in theProject planning, implementation, and maintenance of traffic and transport(Loan 2817-IND) facilities; and to establish a process of coordinating the investment

activities of central, provincial and city government agencies in urbantransport programs.

Jabotabek Urban To provide technical assistance for institutional development and training 1988 ClosedDevelopment Project in urban management; and physical works for road improvement and(Loan 2932-IND) construction.SecondJabotabek To develop and implement a coordinated program of physical 1990 ClosedUrban Development investments, technical assistance and policies for urban water supply,Project wastewater disposal, drainage and water resources management in(Loan 3219-IND) Jabotabek.Third Jabotabek To introduce a more effective and sustainable approach to provision of 1991 ActiveUrban Development basic services in Jabotabek through extensive community participation inProject recognized low-income urban communities; to strengthen environmental(Loan 3246-IND) protection and pollution control in the Jakarta region; and to improve

maintenance of existing infrastructure networks and provide a firmer_ basis to plan future development priorities.

Following projectsSulawesi - Irian Jaya To provide urban infrastructure in selected cities in Sulawesi and Irian 1991 ClosedUrban Development Jaya with increase in access of households to water supply and sanitationProject services; to support improved infrastructure programming and financial(Loan 3340-IND) planning in these cities; to encourage local governments and water

enterprises in revenue generation and improved financial management.

14

Table 2 (Cont'd)

Loanlcredit title Purpose Year of Statusapproval l

Surabaya Urban To improve: urban service levels and affordability, particularly for the 1994 ActiveDevelopment Project poor in Surabaya; productivity and the effectiveness of investments(Loan 3726-IND) through better infrastructure planning and management, revenue

mobilization, project implementation and O&M; environmental qualityby enhancing local government capacity to plan, implement and operateinfrastructure in an environmentally sound fashion and also by enhancingcommunity participation.

Semarang-Surakarta To improve the provision of urban infrastructure services and the 1994 ActiveUrban Development efficiency of the urban investments in Semarang-Surakarta; to promoteProject stronger, more autonomous, and financially more independent municipal(Loan 3749-IND) governments; and to contribute towards poverty alleviation, mainly

through better access to essential services and an improved urbanenvironment.

Kalimantan Urban In the five cites of Banjarmasin, Balikpapan, Palangkaraya, Pontianak, 1995 ActiveDevelopment Project and Samarinda and their respective Water Enterprises (PDAMs), the(Loan 3854-IND) project will improve the provision of urban infrastructure services and

the efficiency of the urban investments; promote stronger, moreautonomous, and financially more independent municipal governments;contribute towards poverty reduction, mainly through better access toessential services; and improve the environment.

Second East Java To improve the provision of urban services to more than 5 million 1996 ActiveUrban Development residents of urban areas in East Java Province (excluding the city ofProject Surabaya) through appropriate investments in physical infrastructure; to(Loan 4017- IND) strengthen operations and maintenance activities for urban services, and

support improved planning, programming, budgeting, financialmanagement and local revenue generation by local governments; and toimprove urban environment management and reduce environmentalimpacts.

Second Sulawesi To improve the delivery of urban infrastructure services for about 3.6 1997 ActiveUrban Development million residents in 41 towns and cities of 40 local governments of theProject four Sulawesi provinces through appropriate investments in physical(Loan 4105-IND) infrastructure; to strengthen O&M activities for urban services, and

support improved planning, programming, budgeting, financialmanagement and local revenue generation by local governments; and toimprove urban environmental management and reduce enviromnentalimpacts.

Bali Urban Improve urban infrastructure services in Bali in a sustainable manner to 1997 ActiveInfrastructure Project meet: (i) basic needs in all important urban centers and (ii) the needs for(Loan 4155-IND) growing urbanization in south Bali as a result of tourism and other

economic activities.

*Preceding projects are those within the ten year limit.

15

Table 3: Project Timetable

Steps in project cycle Date planned Date actual/atest estimate

Identification (IEPS) 01/88 06/20/89Preparation (FEPS) 01/90 02/21/90Appraisal 06/90 06/26/90Negotiations 08/90 02/21/91Board presentation 10/90 03/19/91Signing 06/90 05/03/91Effectiveness 06/91 06/25/91Project completion 08/31/96 05/31/97Loan closing 12/31/96 09/30/97

Table 4: Loan Disbursements: Cumulative Estimated and Actual(US$ million)

Bank FY FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98Appraisal estimnate 3.5 31.9 71.4 111.7 152.2 180.3 180.3 180.3Actual 5.5 10.9 41.1 78.3 116.0 148.4 171.2 173.0Actual as % of estimate 157 34.0 57.6 70.1 76.2 82.3 95.0 96.0

ate of final disbursement February 9, 1998

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Table 5: Key Indicators for Project Implementation

Project Description i Measurements Targeted AchievedI. East Java Province

Water SupplyWell/Deep well unit 3 11Water treatment Plant unit 4 IReservoir unit 3 12Installation of Transmission Pipes km 1.4 48Installation of Distribution Pipes km 90 379Installation of House connection unit 11,237 8,580Installation of Public Hydrant unit 56 10Water Pump unit 8 17

Urban RoadsConstruction of New Roads km 141 92Upgrading of Roads (Widening) km 1,557 975Rehabilitation (Overlay & Repair) km 524 135Construction, Replacement of Bridge/Culvert km 53.5 25.1

DrainageConstruction of New Drains km 203 150Normalization of Canal km 315 117Rehabilitation of Drains km 85 52Maintenance of Drains km 254 79

Solid WasteWaste Disposal Site square meter 84,270 26,392Transport Depot unit 774 106

SanitationLand acquisition square meter 10,115 3,465Sewerage Treatment Station unit 8 -New Sanitation Facilities unit 2565 1267Rehabilitation of Sanitation Facilities unit 5977 2463

KIP/MIIPArea Covered hectare 4389 7694

17

Table 5 (cont'd)Project Description | Measurements Targeted Achievedl

HI. Bali Province lWater SupplyInstallation of Main Pipe km 315 255Installation of Service Pipe mn. 245 180Installation of House Connections unit 21,575 12,900Installation of Public Tap unit 133 120Increase of Reservoir Capacity cubic meter 15,000 15,000Construction of Building square meter 5,750 4,750

Urban RoadsConstruction of New Roads km 44.6 34Upgrading of Roads (Widening) km 252 240Rehabilitation (overlay & Repair) km 49 40

DrainageConstruction of New Drains km 85 82Upgrading of Drains (Enlarging) km 30 30Rehabilitation of Drains km 38 35

Solid WasteLand Acquisition hectare 54 4

SanitationLand Acquisition hectare 5 -Construction of Sludge Disposal Site square meter 2,000 2,000Construction of Sanitation Facilities unit 10 10

KIP/MIIPArea Covered hectare 1,163 1020

Source: PPMU Report, 1995

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Table 6: Key Performance Indicators for Project OperationA. Main Achievements of Participating PDAMs

Days Debt Debt toVolume Volume Service Number Staff Accounts Average Working Operating Service Debt +

of perPDAM Year Produced S o I d % Ratio Connect 1000 Receivable Tariff Ratio Ratio Coverage Equity

UfW ions ConnMm3 Mm3 (Rp/m3)

East Java ProvinceBatch I

Kabupaten Banyuwangi 1996 SAR 3.913 3.131 20% 34% 9,800 11 60 293 62% 91% 1.8 49%1996 Actual 5.209 3.859 26% nd 12,396 13 47 516 63% 100% 2.3 69%

Kabupaten Jember 1996 SAR 3.891 2.926 25% 31% 12,300 10 60 610 50% 57% 1.5 59%1996 Actual 5.186 4.068 22% nd 16,847 7 65 434 113% 145% -1.2 73%

Kotamadya Kediri 1996 SAR 1.594 1.192 25% 4% 2,900 22 79 644 51% 64% 1.6 50%1996 Actual 2.659 1.892 29% nd 7,775 9 91 677 88% 116% 3.1 81%

Kotamadya Mojokerto 1996 SAR 1.192 0.890 25% 16% 3,260 13 68 561 56% 83% 2.5 48%1996 Actual 1.390 0.796 43% nd 4,953 12 235 296 60% 98% na 47%

Kotamadya Probolinggo 1996 SAR 2.135 1.708 20% 5% 4,500 14 65 406 69% 85% 1.6 45%1996 Actual 2.464 2.070 16% nd 7,102 10 93 493 60% 92% na 62%

Kabupaten Sidoarjo 1996 SAR 11.855 9.398 21% 52% 28,880 10 60 746 63% 79% 5.9 52%1996 Actual 7.932 5.649 29% 21% 19,794 12 71 1,459 100% 117% 57.5 46%

Kabupaten Sumenep 1996 SAR 2.726 2.052 25% 33% 4,590 17 65 450 56% 78% 1.4 56%1996 Actual 2.363 1.765 25% 48% 7,342 9 87 321 71% 100% na 58%

Batch IIKabupaten Bangkalan 1996 SAR 2.146 2.241 21% 63% 8,640 103 66 638 57% 81% 2.6 29%

1996 Actual 1.911 IA18 26% 45% 8,027 14 76 778 44% 99% 4.7 60%

Kotamadya Blitar 1996 SAR 1.988 1.312 34% 36% 8,500 11 50 573 65% 103% na 42%1996 Actual 1.492 1.063 29% 3d 6,623 15 283 502 46% 82% 151.0 76%

Kabupaten Gresik 1996 SAR 17.169 13.401 22% 33% 35,290 11 32 1,664 88% 97% 3.1 20%1996 Actual 1.965 1.479 25% nd 8,577 10 24 1,531 50% 73% 1.4 64%

Kabupaten Jombang 1992 Actual 1.194 1.015 15% 24% 4,478 1 1 253 249 52% 113% na 3%1996 Actual 2.068 1.638 21% 30% 7,266 7 60 393 65% 130% na 64%

Kabupaten Lumajang 1996 SAR 3.952 2.852 28% 33% 10,200 13 62 660 57% 74% na 65%1996 Actual 2.898 2.230 23% nd 9,694 18 103 544 69% 136% 0.7 79%

Kotamadya Pasuruan 1992 Actual 4.624 2.897 37% nd 11,698 9 98 294 67% 91% na 6%1996 Actual 4.737 2.620 45% 43% 12,571 10 113 733 71% 100% 6.1 20%

Kabupaten Situbondo 1996 SAR 3.393 2.644 22% 28% 14,100 9 47 499 55% 90% 0.6 39%f1996 Actual 3.638 2.774 24% 70% 13,175 7 43 437 62% 115% 2.2 46%

Note: nd = No data

19

Table 6A (cont'd)1 1 J Days Debt Debt to

Volume Volume Service Number Staff Accounts Average Working Operating Service Debt +

PDAM Year Produced S o I d % Ratio Connect 1000 Receivable Tariff Ratio Ratio Coverage EquityUfW ions Conn

Mm3 Mm3 _ (Rp/m3)_ - ~~~~~~~~~B a I i Provinc e

Batch I

Kabupaten Badung 1996 SAR 24.885 19.908 20% 46% 25,500 14 60 677 38% 55% 2.2 62%1996 Actual 24.847 16.960 32% 72% 42,462 8 18 782 64% 100% 2.6 74%

Kabupaten Buleleng 1996 SAR 5.800 4.597 21% 55% 11,320 12 60 569 38% 48% 3.8 62%1996 Actual 6.334 5.289 17% 89% 17,523 11 60 540 87% 109% 0.5 64%

Kabupaten Jembrana 1996 SAR 1.936 1.489 23% 43% 5,390 13 60 450 70% 98% na 0%1996 Actual 2.697 1.535 43% 89% 8,471 12 45 708 163% 239% na 2%

Kabupaten Klungkung 1996 SAR 1.765 1.412 20% 23% 4,770 11 60 676 48% 61% 4.3 0%1996 Actual 2.469 1.866 24% nd 9,259 11 50 360 263% 367% na 41%

Batch II

Kabupaten Bangli 1992 Actual 1.215 0.795 35% 66% 2,526 25 82 198 60% 142% na 20%1996 Actual 2.970 1.293 56% 77% 6,319 21 59 679 226% 383% na 35%

Kabupaten Gianyar 1992 Actual nd nd nd nd 9,056 14 53 nd 64% 109% na 1%1996 Actual 6.419 4.996 24% 99% 21,516 8 55 649 84% 132% 5.6 51%

Kabupaten Karangasem 1992 Actual 1.837 1.364 26% 58% 3,848 17 183 151 73% 143% na 0%1996 Actual 3.848 2.879 25% 84% 6,422 24 87 270 150% 198% 0.4 12%

Kabupaten Tabanan 1992 Actual 3.323 2.531 25% 63% 11,367 12 95 327 60% 111% na 68%1996 Actual 4.743 3.673 25% 88% 20,385 11 52 595 128% 167% -1.0 61%

Note: nd = No data

20Attachment to Table 6A

Main Achievements of Participating PDAMs

1. Twenty two PDAMs participated in the project - fourteen in East Java and eight in Bali. The value ofinvestments in the majority of participating PDAMs was quite small; only five PDAMs - Sidoarjo and Gresik inEast Java, and Badung, Klungkung, and Gianyar in Bali - had project investments in excess of $3 million. Theproject did not finance PDAM Surabaya's investments, as the proposal to bring water for Surabaya fromUmbulan Springs was deferred and a subsequent separate project (Surabaya Urban Development Project - Loan3726) financed the rest of PDAM Surabaya's investment program. Funding for the project's water supplyinvestments was provided by a combination of sources - internal cash generation, sub-loans from the proceeds ofEJB loan, and other local borrowing.

2. In general, all participating PDAMs exceeded SAR targets for water production and number ofconnections - Sidoarjo and Gresik in East Java were exceptions, as they did not receive water that was expectedfrom Umbulan Springs. (The transmission main from Umbulan Springs, which was to be financed from aseparate - private - source, has not yet been built.) Targets for unaccounted for water (UFW) were met by onlysome of the PDAMs. Several PDAMs achieved the target staffing ratio of 10 staff per 1000 connections,although there were a few who did not.

3. Financial matters. Compliance with financial covenants on cost recovery, debt service coverage, andleverage was unsatisfactory. Most PDAMs met the first loan covenant of recovering 0 & M costs. However, atthe end of 1996, only nine out of twenty two achieved the target of full cost recovery (O & M plus depreciation).These results are similar to the findings of the Project Completion Report for the Second East Java Water SupplyProject (Report No. 13637, dated October 26, 1994), which found that only two of thirteen East Java PDAMsparticipating in that project recovered 0 & M and depreciation in 1993. Four PDAMs failed to meet the debtservice coverage ratio requirement of 1.3 and five PDAMs exceeded the ratio of debt to debt plus equity of 0.7.

4. The principal issue in this regard was the low tariff levels and the inability of the PDAMs to increasetariffs to the required levels. An inadequate appreciation on the part of PDAMs and their local governments ofthe requirements of the financial covenants, the several levels of approvals required, and the absence of anydisincentives for failure to increase tariffs, all contributed to the problem. Tariff increases required in 1992 weredelayed, and by the time of the mid-term review in 1994, at least five participating PDAMs did not cover 0 & Mexpenses. Results summarized in Para. 3 above reflect the efforts of various Bank missions in over coming theproblems described above. Tariff increases from a very low base in most cases were too little and too late.

5. Future Remedial Action. In the case of Bali, Financial Recovery Action Plans (FRAPs) have been agreedwith five PDAMs under BUIP, which inter alia, include full compliance with EJB financial covenants, includingcost recovery. The performance of the remaining three PDAMs will also be monitored by the government andthe Bank to ensure that EJB financial covenants are met during the life of BUIP. In the case of East Java, sixPDAMs which participated in EJB are also participants in EJ2; their performance, as well as that of the remainingeight participants in EJB, towards meeting EJB financial covenants will be monitored by government and theBank.

21Table 6: Key Performance Indicators for Project Operation

B. Revenue Improvement Action Plan Results

Growth Rate 1995/96-1996/97Local Government Targeted RealizedEast Java ProvinceBatch IKotamadya Kediri 18.0% 25.2%Kotamadya Mojokerto 17.3% 26.4%Kotamadya Pasuruan 19.7% 34.9%Kotamadya Probolinggo 14.8% 6.4%Kabupaten Banyuwangi 14.2% 28.1%Kabupaten Jember 13.3% 32.6%Kabupaten Lamongan 13.6% 17.8%Kabupaten Sidoarjo 20.3% 44.5%Kabupaten Sumenep 15.1% 63.8%Batch IIKotamadya Blitar 17.7% 18.8%Kotamadya Madiun 12.8% 34.1%Kabupaten Bangkalan -9.7% 30.4%Kabupaten Bojonegoro 12.8% 41.0%Kabupaten Gresik 12.1% 53.6%Kabupaten Jombang 19.0% 40.9%Kabupaten Lumajang 14.7% 25.8%Kabupaten Malang 11.4% 32.5%Kabupaten Pasuruan 12.7% 33.5%Kabupaten Ponorogo 13.3% 25.1%Kabupaten Situbondo 14.0% 10.5%Kabupaten Tuban 15.6% 51.4%Kabupaten Tulungagung 12.1% 45.6%Batch III .Kotamadya Malang 20.4% 26.5%Kabupaten Pacitan 13.6% 43.6%Kabupaten Magetan 12.1% 51.5%Kabupaten Ngawi 15.5% 28.5%Kabupaten Pamekasan 23.2% 20.4%Kabupaten Sampang 3.0%0 - 13.8%Kabupaten Kediri 11.4% 37.4%Kabupaten Blitar 18.9% 30.1%Kabupaten Madiun 26.9% 26.5%Kabupaten Probolinggo 16.6% 18.8%Kabupaten Bondowoso 15.2% 36.6%Kabupaten Mojokerto 13.9% 33.8%Kabupaten Trenggalek 16.1% 21.7%Kabupaten Nganjuk 13.7% 29.1%

22

Table 6B (cont'd)Bali Province

Batch I lKabupaten Badung 18.7% 17.5%Kabupaten Buleleng 20.0% 23.8%Kabupaten Jembrana 21.8% 21.5%Kabupaten Klungkung 16.8% 20.4%Kotamadya Denpasar 17.6% 24.7%Batch IIKabupaten Bangli 17.3% 24.9%Kabupaten Gianyar 16.6% 12.1%Kabupaten Karangasem 10.7% 24.4%Kabupaten Tabanan 14.1% 36.9%

23

Table 6: Key Performance Indicators for Project OperationC. Operations & Maintenance Expenditures of Local Governments

PJM Implemented Change % ChangeLocal Government Rp million Rp million Rp million Implmented/PJM

East Java ProvinceBatch IKotamadya Kediri 3,390 4,274 884 26.10Kotamadya Mojokerto 2,285 3,100 815 35.60Kotamadya Pasuruan 2,507 1,258 -1,249 -49.80Kotamadya Probolinggo 2,176 2,736 560 25.70Kabupaten Banyuwangi 2,805 7,906 5,101 181.80Kabupaten Jember 4,721 3,377 -1344 -28.50Kabupaten Lamongan 1,287 1,550 263 20.40Kabupaten Sidoarjo 2,250 2,931 681 30.30Kabupaten Sumenep 1,582 2,284 702 44.40Batch II _ _Kotamadya Blitar 1,332 2,143 813 61.00Kotamadya Madiun 3,030 2,005 -1,025 -33.80Kabupaten Bangkalan 781 1,159 378 48.40Kabupaten Bojonegoro 1,182 1,409 227 19.20Kabupaten Gresik 1,354 1,446 92 6.80Kabupaten Jombang 1,582 2,188 606 38.30Kabupaten Lumajang 1,427 1,923 496 34.80Kabupaten Malang 691 1,837 1,146 165.90Kabupaten Pasuruan 822 1,969 1,147 139.60Kabupaten Ponorogo 2,560 2,516 -44 -1.70Kabupaten Situbondo 858 2,049 1,191 138.80Kabupaten Tuban 1,284 1,836 552 43.00Kabupaten Tulungagung 1,592 2,147 555 34.80Batch III _Kotamadya Malang 3,654 4,396 743 20.32Kabupaten Pacitan 700 446 -254 -36.31Kabupaten Magetan 244 4,434 4,190 1717.30Kabupaten Ngawi 617 1,007 390 63.16Kabupaten Pamekasan 10,912 432 -10,480 -96.04Kabupaten Sampang 8,395 576 -7,818 -93.13Kabupaten Kediri 737 586 -151 -20.46Kabupaten Blitar 420 1,149 728 173.19Kabupaten Madiun 627 527 -101 -16.08Kabupaten Probolinggo 103 582 479 463.79Kabupaten Bondowoso 273 483 211 77.33Kabupaten Mojokerto 894 339 -555 -62.09Kabupaten Trenggalek 447 661 214 47.83Kabupaten Nganjuk 3,109 807 -2,302 -74.05

24

Table 6C (cont'd)Local Government PJM Implemented Change % Change

Rp million Rp million Rp million FImplmented/PJMBali Province

Batch IKabupaten Badung 9,545 7,564 -1,981 -20.80Kabupaten Buleleng 1,511 3,458 1,947 128.90Kabupaten Jembrana 2,288 1,557 -731 -31.90Kabupaten Klungkung 873 1,063 190 21.80Kotamadya Denpasar 710 798 88 12.40Batch IIKabupaten Bangli 799 867 68 8.50Kabupaten Gianyar 1,698 1,899 201 11.80Kabupaten Karangasem 1,299 1,629 330 25.40Kabupaten Tabanan 1,665 2,559 894 53.70

25

Table 7: Studies Included in Project

Study/Technical Assistance Purpose as defined at Status Impact of study/technical assistance Assessment ofappraisal/redefined outcome

I Local Government Financial Local government financial Completed Design and pilot testing were behind UnsatisfactoryAccounting and Management accounting and management reform schedule, but field testing in East Java andReform Bali was not followed through.

2 Preparation of PJM for Support for preparation of PJM for Completed Contributed to the preparation of the SatisfactoryKotamadya Malang Malang city Second East Java Urban Development

Project (EJ2).3 Preparation of PJM for Batch III Batch III program preparation and Completed Contributed to the preparation of EJ2. Unsatisfactory

Local Governments related start-up support

4 Finalization of Loan Proposal Finalization of loan proposal Completed Assisted in preparing KUDP. SatisfactoryDocumentation and Appraisal documentation and appraisal supportSupport for Kalimantan Urban for KUDPDevelopment Project (KUDP)

5 Preparation of Water Supply TA for SUDP-II preparation for water Completed Assisted in preparing SUDP-II. SatisfactorySector for Second Sulawesi Urban supply sector (extension of TADevelopment Project (SUDP-II) services)

6 Preparation of Future Project - EJ2 Project preparation of EJ2 Completed Assisted in preparing EJ2. Satisfactory

7 Preparation of Future Project - Project preparation of BUIP Completed Assisted in preparing BUIP. SatisfactoryBali Urban Infrastructure Project(BUIP) _

26

Table 8A: Project Costs(US $ million)

Original Actual / Latest _I t e m Project Cost Estimate Project Cost /c

Local Foreign Total Local Foreign Total

A. Program Infrastructure Development and O&MI Water Supply 53.7 42.8 96.5 /a 10.7 41.6 52.32 Drainage 16.6 7.1 23.7 18.6 25.0 43.63 Solid Waste Management 9.7 3.6 13.3 6.3 5.5 11.84 Sanitation J Sewerage 6.6 2.8 9.4 2.2 2.5 4.75 Urban Roads 62.3 26.8 89.1 60.4 61.7 122.16 Karnpung Improvement 7.6 3.3 10.9 6.9 8.2 15.0l7 Market Infrastructure Improvement 0.8 0.3 1.1 1.9 1.2 3.1

Subtotal, Program Infrastructure Investment 157.3 86.7 244.0 /b 106.9 145.6 252.5

80&M 69.3 26.9 96.2 106.1 - 106.1

Subtotal, Investment and O&M 226.6 113.6 340.2 213.1 145.6 358.7

B. Program Management 7.5 5.9 13.4 17.5 11.0 28.5

C. Institutional Development 2.9 4.0 6.9 8.9 6.4 15.2

Sector Development 2.1 1.3 3.40 1.2 5.0 6.2Municipal Management 0.8 2.7 3.50 5.7 1.4 7.1

Total Project Cost 237.0 123.5 360.5 237.4 163.0 400.4

Interest During Constructionon Bank Loan - 10.0 10.0 7.6 - 7.6on Other Loans 2.9 - 2.9 - -

Total Financing Required 239.9 133.5 373.4 245.0 163.0 408.0

/a Includes $13.1 million for Umbulan Springs distribution pipeworks in Kotamadya Surabaya/b Includes $13.1 million for contracted engineering design and supervision/c Actual costs were converted to US$ based on the rate of rupiah to US$ at December 31 of each year

27

Table 8B: Project Financing(US$ Million)

Project Financing Plan Actual Project Financing I

I t e m Amount % Project % Loan Amount % Project % Loan

Regional Level Financing

Local Governments

Borrowing 12.4 Ia 3.3% 8.1 2.0%

Local Revenues and Property Tax Share 46.4 12.4% 34.2 8.5%

INPRES Development Grants 23.7 6.3% 72.2 17.7%

SDO Routine Staff Salary Grant 2.4 0.6% 8.3 2.0%

Water Enterprises

Borrowing for Investment 47.9 lb,c 12.8% 51.9 12.7%

Internal Financing for O&M and Investment 69.3 18.6% 76.8 18.8%

Provincial Government Direct Funding 13.1 3.5% 8.3 2.0%

Other 6.9 1.8% - 0.0%

.Subtotal, Regional Level 222.1 59.5% 259.8 63.7%

Central Level Financing

Central Level Responsibilities 75.4 Id 20.2% 81.9 20.1%

Regional Level Responsibilities 75.9 20.3% 66.4 16.1%

Subtotal, Central Level 151.3 40.5% 148.2 36.3%

TOTAL FINANCING 373.4 le 100.0% 408.0 100.0%

Donor Funding

Bank Loan (69.1% Eligible Amount) 180.3 If 48.3% 173.0 42.4% 100.0%

Japanese Grant 4.2 1.1% 4.2 1.0%

Subtotal 184.5 49.4% 100.0% 177.2 43.4%

Distributed As:

Subsidiary Loans

Water Enterprises 38.4 21.3% 38.0 22.0%

Local Governments 11.1 6.2% 6.8 2.2%

Central Grants-in-kind -

Central Responsibilities 59.1 Ig 30.4% 63.8 36.9%

Regional Responsibilities 75.9 42.1% 68.6 38.9%

Regional Level Domestic Funding 161.9 212.8

Central GOI Domestic Funding 27.0 18.1

TOTAL 373.4 le 408.0

/a Including Rp 5. I billion ($2.7 million equivalent) borrowing interest during construction/b Including Rp 23.4 billion ($12.3 million equivalent) borrowing by PDAM Surabaya for Umbulan Springs distribution pipeworks/c Including Rp 16.0 billion ($8.4 million equivalent) for interest on borrowing during construction/d Including Rp 3.4 billion ($1.8 million equivalent) interest during construction (for domestic loan to PDAM Malang)/e Including interest during construction of Rp 24.5 billion ($12.9 million equivalent)/f For Bank loan calculation, eligible amount is total cost less taxes and duties, current O&M, land acquisition and interest duringconstruction (Rp 213.5 billion or $112.3 million equivalent)

2& Includes $4.2 million equivalent of Japan Grant Funds to GOI/h Actual costs were converted based on conversion rate of rupiah to US$ at December 31 of each year

28

Table 9: Economic Costs and Benefits

Sector Sub-project ICR Finding Appraisal CommentSize Sample EIRR EIRR

1. Roads S 0 NA >10% On technical criteriaEast Java M 10 16-18% >10%Bali M 10 12-20% >10% 2@5%; 1@37%

2. Drainage S 0 NA >10% On technical criteriaEast Java M 4 11-16% >10%Bali M 5 >20% >10%

3. Water SupplyEast Java All All >10% >10% 3 ExceptionsBali All All FIRR Negative >10% One at 22%

4. Other Sectors Agreed technical criteria and at least cost solutions adopted. No calculation at appraisal and ICR.

Notes.1. Sub-project size - (S)mall = investment costs < Rp.400 million

(M)edium = Rp.400 million < Investment costs < Rp.4 billion(L)arge = Investment costs > Rp.4 billion

2. See attachment to Table 9 for further details, especially on comments.

29

Attachment to Table 9Economic Costs and Benefits

Approach

1. At appraisal, a structured approach was adopted to the economic analysis of the large number ofsub-projects in the various sectors. Economic viability of small sub-projects (cost below Rp.400 million,in 1989 prices) was presumed, provided they followed the technical planning and design criteria agreedwith the Bank. Medium (between Rp. 400 million and Rp 4 billion in 1989 prices) and large sub-projects(above Rp. 4 billion) in urban roads and drainage sectors would require economic analysis. Medium sub-projects were subject to a simplified economic analysis, while large sub-pr